The Real Reason behind IR35 in the Private Sector

IR35. Two letters and two numbers which if mentioned to a contractor are likely to draw the reaction of either bitter disgruntlement or a 5 minute expletive laden rant.

But first off if you don’t know what IR35 is…

What is IR35

In short it stands for Inland Revenue Article 35. This is a tax brought in to charge contractors the same rate as PAYE. If you’re not a contractor and have never been then you’d probably feel that contractors should simply be charged tax the same amount as permanent employees. But you also have to consider that many contractors are out of work for prolonged periods, have specialist skillsets that companies need for short term needs and are vital to the UK economy.

By introducing a tax like this to the private sector, as it’s already in the public sector, it causes problems and upsets the apple cart. As of April 2020 when IR35 comes into force in the private sector many current contractors will leave contracting and chose either permanent employment or to work abroad. Many companies in the UK that are reliant on contractors to fulfil short term obligations will either have to cut projects altogether, try and convince contractors to go permanent and/or possibly have to pay economically unviable salaries to answer problems that a contractors skillset can solve.

All in all, IR35 is causing a bit of a sh** storm and it’s initiating mayhem in the contractor market.

Is there a way around the problem?

Officially yes, but realistically the official line is flawed.

What I love about the internet (sarcastically) is that every recruiter and HR company out there explain IR35 very matter of factly and avoid either telling the truth or understanding the truth. If you watch YouTube videos or LinkedIn videos these same white-collar types are sat there talking uber professionally and running through things like it’s a straightforward and painless process. But it isn’t.

Officially you are either deemed “In Scope” which means IR35 applies to you or “Out of Scope” which means IR35 does not apply to you. So, contractors who are deemed out of scope don’t have to worry and can carry on contracting without fear of any comeback. This is where the official line that all the blinded recruiters and HR professionals miss the point on.

The Truth about IR35

A key line in IR35 is that whereas before it was the contractor who declares what Tax they should be paying, under the new rules coming in April, it is the company who employ the contractor who the responsibility falls under. And this is where the whopping flaw in the official line of IR35 begins.

Companies don’t like getting fined. It’s bad for business. Share prices can fall. CCJ’s can ruin your credit score. It can cause havoc. So, companies tend to play it very safe when it comes to financial risk. And who’s the scariest of all financial groups who could cause your company problems? The Tax Man. Or Tax Woman. Either way they strike fear into any company’s board meetings.

In or Out of scope

In Scope is where the contractor is doing a job that would normally be something the company employs someone for on a permanent basis, or that could be interpreted as something that they could hire for permanently. This is a job judged to be something that would be typical of the companies type of business. For example, you are an architecture practice and employ a contract architect. The chances are you have or have had permanent architects doing the same job. So that contractor come April 2020 is deemed “In Scope” and therefore would have to pay the PAYE level tax.

Out of Scope is where the contractor is doing a job that in no way shape or form is something the company would employ permanently for. For example, a supermarket needs their stores electrics rewired and it’ll take 3 weeks to do. They wouldn’t typically employ electricians as a supermarket, so they’d get a contractor in. This would be deemed on the official line, “out of scope”.

Where the bullsh** comes in

However, this is where the Real Reason behind IR35 comes in to play. Officially HMRC are introducing IR35 to the private sector to make things fair for all. They’re doing a good deed from the PR angle.

But companies know that HMRC tend to set their interpretation of in scope and out of scope to the harsh setting. They are therefore understandably fearful that if they deem a contractor out of scope and HMRC disagree with them, they’re going to get it in the neck. With a metaphorical blast from a double barrel shotgun.

Therefore, waves of UK companies currently employing contractors whose own self-assessment considers them out of scope are planning on playing it safe. This means blanket placing all contractors as being in scope. This avoids risk and the wrath of HMRC.

The Truth of why IR35 is coming into force in the private sector

The truth is that HMRC want more tax income and this is an easy way of generating it. Never mind that it’ll cause havoc and have longer term implications. The government don’t care. They want money now and this works. The official line is absolute nonsense.

IR35 coming into the private sector is just another way of the government squeezing more money out of the economy and that’s the truth.

HMRC know that companies fear any repercussions and will do the enforcement of IR35 for them. Easy money. Just not for the poor contractor who if common sense played a part in anything would be out of scope anyway.

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